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Location, Learning and Logistics: Weekend Reading

Deciding where to locate production facilities is a critical costly decision for companies—one that can have lasting implications on a company’s top and bottom lines. When making traditional location decisions, executives generally take into account traditional concerns such as labor costs, taxes and real estate. But they may be sacrificing future performance potential if those are the only factors considered, and they need to understand and manage the trade-offs in capacity location decisions.

Drawing on research in the field of location analysis, along with multiple company case studies, the authors demonstrate that the complexity of the production process and the way knowledge is transferred from R&D to the manufacturing floor are key determinants of the future success of companies. If these factors are not addressed when determining where to locate development and production facilities, future growth and evolution of product offerings may be compromised.

A Framework for Integrating Facility Quantity and Learning Mode
Using case studies, their article offers a framework to guide executives on factors to consider when determining how to locate production capacity around the globe. The framework considers three learning and logistical factors that contribute to an effective production location decision:

1. Learning mode—The manner in which knowledge about a production process is transferred from R&D to the factory floor. Executives should ask, Is this a learn-by-doing context in which production staff need high-levels of interaction with R&D in order to make real-time adjustments and process changes, or can R&D do all this learning before or in advance and simply communicate steps to the shop floor?

2. Market-to-plant ratio (MPR)—This ratio serves as an indicator of the market’s capacity to support more than one production location and is calculated as a ratio of global market demand for a product and the minimum efficient size for a production facility.

3. Value density—The relationship between product value and the logistical costs of distribution. By examining value density, executives can determine whether there might be benefits to scatter production capacity or to centralize it.

The framework can be used to situate a company or product line in one of three sectors based on attributes associated with learning mode, MPR and value density:

Sector I—Location decisions driven by traditional factors, not development issues. Sector I corresponds to contexts in which learning-before-doing is the relevant learning mode for a company’s production process.

Sector II—Location decisions influenced by future development implications; may override traditional cost factors. Sector II companies inhabit a danger zone in which learning-by-doing is required and the company is constrained to a single production location.

Sector III—Location decisions driven by traditional factors; caveat of at least one colocated development site. For Sector III companies a high MPR and/or low value-density provides the incentive and ability to geographically distribute production capacity. However, caution is still warranted, as learning-by-doing demands that development engineers have access to the factory floor.

Using the framework, executives can evaluate how to position production capacity around the globe and derive a better understanding of how to promote long-term business and product development success. The framework can also be used to monitor the migration of the company or product line across the different sectors as market conditions change.

To use the framework effectively, executives should understand the important attributes of the markets they serve and the products they offer, and consider the mechanism by which knowledge about how to produce is transferred from the lab to the shop floor.

For the most part, the regular rules of location strategy apply. It is incumbent upon executives to account for traditional factors such as real estate costs and availability, taxes and incentives, logistical costs, and importantly, the availability of talent as they choose production locations. Yet there are important additional insights to consider as part of a location strategy.

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